HILSENRATH’S TAKE
Early in this recovery Federal Reserve officials debated whether slow job growth was the result of cyclical problems in the economy – namely slow economic growth – or secular problems – such as people not having the right skills for jobs that were available. The consensus that emerged at the Fed was that the root of the slow job growth problem was cyclical, and thus the Fed kept stimulating the economy to promote more growth.

A new and different secular vs. cyclical debate about the job market at the Fed is playing out differently. This one isn’t about job growth. It’s about people leaving the labor force. The question is whether people are leaving the labor force for cyclical reasons – again, not enough economic growth or job growth – or secular reasons, such as the retirement of Baby Boomers.

The secularistas are winning this one. Minutes of the Fed’s January policy meeting showed officials came to this conclusion: “Much of the downward trend in the labor force participation rate since the start of the recession was seen as the result of shifts in the demographic composition of the workforce and the retirement of older workers; the extent of the cyclical portion of the decline was viewed by some as difficult to gauge at present.”

This matters because it touches on the Fed’s coming policy decisions. A mostly secular decline in labor force participation means many of the workers leaving the labor force aren’t coming back. This means less slack in the economy and less downward pressure on inflation than would be the case if the labor force participation decline was cyclical. The Fed isn’t near raising interest rates. But the secular twist on labor force participation puts officials a little closer than they’d otherwise be.

- By Jon Hilsenrath

GRAPHIC CONTENT
Nearly a year after Canadian Finance Minister Jim Flaherty scolded the country’s biggest banks for fueling record-high housing prices by cutting mortgage rates, his campaign to prevent a bubble is gaining traction. http://on.wsj.com/1oOiqjC

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Fed Rate Hike Discussion Begins. Conversation at the Federal Reserve’s last policy meeting turned to something that hasn’t been a serious topic for years – the possibility of interest rate increases in the near future. While this is far from the consensus view, a “few” Fed officials argued at a Jan. 28-29 policy meeting that increases might be needed fairly soon to prevent inflation from rising too high. http://on.wsj.com/1kYAKWT
Key Passages in the Fed’s Minutes http://on.wsj.com/1matwx6

Fed Gives Yellen Discretion Over Repo Program. Fed officials gave Ms. Yellen the authority to expand an experimental program run designed to give the central bank better control over short-term interest rates, minutes from the central bank’s January meeting revealed. The program is called an overnight fixed-rate reverse repurchase facility. Under the program, which the Fed started in September, the Fed lends bonds from its large holdings of Treasury securities in exchange for cash from eligible financial firms. Policymakers can change the interest rate offered on this tool, effectively setting a floor for short-term interest rates. http://on.wsj.com/1mvyIPJ

Beneath Fed’s United Front, Points of Dissension Emerge. Not all Fed officials were happy with the decisions made at their January policy meeting. One Fed governor sat out a vote on a key statement of central bank goals. And two opposed extending an experimental program aimed at enhancing the Fed’s control of short-term interest rates. http://on.wsj.com/MB7Qha

WSJ Interview: Fed’s Bullard Sees More Tapering. A strong U.S. economy facing its best prospects since the financial crisis will likely allow the Fed to steadily reduce its monthly bond purchases, St. Louis Fed President James Bullard said Wednesday. http://on.wsj.com/1jHTMNM

Fed’s Lockhart: Despite Weak Data, Taper Process To Proceed. Atlanta Fed President Dennis Lockhart said Wednesday he’s “looking through” recent weak economic data, and continues to expect the central bank to wind down its bond-buying stimulus program over the remainder of this year. Lockhart also said 2008 Fed meeting transcripts to be released soon portray a “decisive” central bank at the height of the financial crisis. http://on.wsj.com/1mayLNg

Fed’s Williams: High Bar for Fed to Change Tapering Trajectory. The bar is high for the Fed to change course on winding down its signature bond-buying program, San Francisco Fed President John Williams said Wednesday on CNBC. http://on.wsj.com/1mtWCv6

Fed to Face G-20 Pressure Over Tapering. The world’s largest emerging economies will this weekend urge the Fed to reconsider the pace of its easy-money exit, fearing a premature wind-down of its bond-buying program could fuel fresh paroxysms in the global economy. Fed Chairwoman Janet Yellen, facing finance ministers and central bankers from the group of the 20 largest industrialized and developing economies meeting here for the first time in her new role, is unlikely to budge. http://on.wsj.com/MDuq8V

G-20 Faces Several Points of Contention. As financial officials from the Group of 20 economies prepare to meet in Australia this weekend, we take a look at some of the contentious issues that form a backdrop to the meeting. http://on.wsj.com/1eWtJgQ

IMF Sees Risk Advanced Economies Will Cut Stimulus Too Early. Rich nations including the United States must avoid pulling back stimulus too quickly given the weak global economic recovery and recent market volatility highlights key risks in some emerging markets, the International Monetary Fund said on Wednesday. http://reut.rs/1kYaU5g

IMF Warns Emerging-Market Central Banks May Need to Tighten. The International Monetary Fund on Wednesday issued its most detailed warning about the financial problems arising in emerging markets this year, saying some countries need to tighten monetary policy and make structural economic changes. http://on.wsj.com/1oSrtju

Europe’s Banks Chafe as Fed Goes It Alone. Europe’s banks may have escaped more lightly than they expected with the final shape of the Federal Reserve’s new oversight rules, but they were still complaining about what they say are the measures’ extra costs. http://on.wsj.com/1bMQklF

European Bankers Grill ECB Panel. Representatives from some of Europe’s largest commercial banks grilled European Central Bank officials on Wednesday over the ECB’s plan to create a single bank supervisor this year, with concerns ranging from the regulatory appeals process, fees and even in what languages they could communicate. http://on.wsj.com/1oS87uO

China Sets New Rules for Bank Liquidity. The country unveiled rules aimed at making sure banks keep on hand enough cash and other liquid assets after three credit squeezes hit the nation’s financial system last year. http://on.wsj.com/MAKvME

BOJ Official Says More Easing Possible. A Bank of Japan policy board member says the central bank won’t rule out the chance of early additional action if the economy shows signs of stumbling. Yoshihisa Morimoto made clear Thursday that the central bank does not have to wait until it has analyzed the full impact of a sales tax increase on the economy before taking action to help cushion any blow, should it deem this necessary. http://on.wsj.com/1mvzjkA

Hungary Central Bank Speaks against Bitcoin. The institution becomes the latest to warn about the risks of virtual currency, especially Bitcoin. http://on.wsj.com/1cqWWUK

Rising Inflation Pressures Malaysia’s Central Bank. The recent pick-up in annual inflation could prompt a hike in interest rates, which have been steady since mid-2011, later this year, analysts said. http://on.wsj.com/1eagclR

- The euro-zone PMI came in at 52.7 in February, slightly below January’s level. The figures suggest the euro bloc continues to expand but will struggle to achieve growth rates much above 1%. http://on.wsj.com/1nQ67QD

- The HSBC China manufacturing PMI fell to 48.3 this month from 49.5, raising fears that slower growth in the world’s second-biggest economy could disrupt the global economy. http://on.wsj.com/1gkF7pm

- With more cold weather forecast to hit part of the U.S., natural-gas prices surged 13% to their highest level in five years. http://on.wsj.com/1gWBh7O

- Global investors are increasingly worried about a sharp slowdown in China, which has eclipsed the U.S. Federal Reserve’s cutbacks in its bond-buying as the biggest perceived threat to the global economy, according to a survey of fund managers by Bank of America-Merrill Lynch.

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